Writing for the New York Times in 2013, “Wealth Matters” columnist Paul Sullivan posed a number of questions about the use of technology. Would it replace advisors — or help them do their job better? And what does it mean for their clients — “the people whose money is at stake?”
Writing for the Wall Street Journal in early 2015, Jane Hodges tackled the topic of Brains, Bots or Both? Hodges notes that technology can help advisors and their clients with certain aspects of managing money, but humans bring unique skills and insights, and “people still like the human touch.” Robo-advice and hybrid models may be gaining momentum, but not surprisingly she concludes that advisors are “not going extinct any time soon.”
Technology eliminates barriers to growth, allowing advisors to streamline their workflow and create efficiencies. More importantly, today’s technology tools can allow advisors to enhance their capabilities and optimize the human capital needed to maintain a successful practice. This gives advisors real power to focus on strategic relationship building and customized solutions, to better serve their current clients — and to bring on new clients — in today’s highly competitive market.
Technology to evolve the advisor’s profession
Through the use of technology, the advisor’s profession has progressed, and continues to evolve. Technology helps re-engineer every step of the advising and investing process. It also empowers advisors with capabilities to analyze and understand the state of a client’s assets more accurately than ever before.
In an industry once known for spreadsheets, number crunching, and manual processes, new technologies support more sophisticated planning, specialized portfolio construction and advanced risk management techniques. For the analytical tools needed to manage today’s complex market dynamics, advisors can leverage financial planning solutions such as MoneyGuidePro and eMoney. To minimize any margin of error when reconciling accounts and reporting performance, advisors can employ portfolio management systems such as Schwab PortfolioCenter, Pershing Albridge, and Advent Black Diamond.
Managing client relationships has also evolved. Two decades ago, a telephone and a rolodex were the advisor’s primary tools. Now, in today’s environment of the 24-hour news cycle and anytime/anywhere access, the most sophisticated advisors build and maintain a strategic approach to client communications across multiple channels for relationship management, prospecting, sales and marketing. To automate administrative tasks, manage the workflow, ensure effective outreach and impactful follow-up, advisors now use technology based CRMs such as Redtail, Junxure and Grendel.
As technology penetrates all aspects of an advisor’s practice, a top priority is improving and increasing the level of technology integration according to advisors surveyed said for a whitepaper by Envestnet-Tamarac and Aite Group entitled “RIA Productivity and Profitability: Integration Pays.” With technology allowing greater access across all areas of a client’s portfolio, advisors can integrate data and products from multiple sources to take a more holistic approach to planning, helping clients realize their full investment potential and reach their long-term goals.
Technology to create a new category
Technology not only redefines every aspect of the advisor’s practice. It is also reshapes the products advisors use, including insurance products like variable annuities. One of the most notable examples in recent years ishow technology has helped to create an entirely new category of Investment-Only Variable Annuity (IOVA).
Through automation, greater efficiencies and enhanced functionality, a costly and complex insurance product has evolved into a low-cost tax-advantaged investing platform. For decades, traditional variable annuities with income guarantees have been a popular retirement income tool, and they can have a place in a client’s portfolio. Their appeal is based upon the combination of downside protection, upside potential and a guaranteed income stream in one investment package, with the potential for tax-deferred accumulation and liquidity of assets. But with asset-based fees that frequently exceed 2 percent or even 3 percent per year, restrictions on underlying investment options, and insurance guarantees that can be difficult to decipher, traditional VAs have their limitations.
Investment-Only VAs are a relatively new category of annuity designed to maximize the benefits of tax deferral. Research has shown that the primary advantage to the variable annuity structure is the power of tax deferral — but it must be low cost. Just as the power of tax-deferred compounding can grow wealth, its corollary is that the drag of compounding fees can reduce wealth. Technology is the key to minimizing fees and keeping IOVA costs low. But for IOVAs to work, low cost is not enough. Functionality and flexibility are key. Technology is essential to take the traditional VA chassis and re-engineer it from the ground up, to build an IOVA that can be used for tax-advantage investing.
Today’s IOVAs utilize web-enabled functionality to support portfolio management, trading and mass transaction capabilities, allowing advisors to efficiently evaluate and employ an expanded selection of funds, including liquid alternatives that use strategies like those favored by hedge funds and elite institutional investors. Other features can include an online application process, and cloud-based account management and performance reporting. Some IOVA’s use an efficient digital marketing approach to replace the traditional high priced commission-based wholesale model.
Integration for more holistic advice
Using technology for the integration of IOVAs is also critical, allowing for back office and front office connection into the advisor’s practice. While many tax-deferred vehicles, including qualified accounts, traditional VAs and other insurance products, are generally viewed as a “held-away” asset, IOVAs can be designed to integrate into an advisor’s practice and be managed alongside taxable accounts. For example, there are IOVAs that use DST FanMail, DST Vision, DTCC, and NSCC to integrate with a range of Broker-Dealer platforms, leading custodial platforms, RIA-centric platforms such as Tamarac, and rebalancing software such as iRebal. Through data feeds and direct links to advisor software and platform solutions, the IOVA becomes an everyday part of the advisor’s investment strategy.
Along with providing low cost, more choice and more flexibility, the Investment-Only VA can be used in ways that a traditional VA cannot. Built as a platform to provide a broader range of investing solutions, IOVAs can help advisors offer new ways to better meet their clients’ needs — deepening the client relationship.
For example, low-cost IOVAs can be used to create more tax-alpha. By ensuring that the portfolio is fully optimized — minimizing the impact of taxes, enhancing portfolio performance and increasing accumulation — an Investment-Only VA can help maximize after-tax returns. This is done through an asset location strategy, often assisted by rebalancing software. Once the tax-efficiency of assets has been evaluated, the advisor can determine which assets should be located in taxable vehicles and which should be located in tax-deferred vehicles like an IOVA.
Likewise, using low-cost IOVAs for legacy planning has become an important solution as the transfer of wealth has become a defining issue for the financial services industry. According to the Pew Research Center, roughly 10,000 Baby Boomers will turn 65 every day for the next two decades. According to Accenture , a “Great Transfer” of wealth — estimated at over $12 trillion — is currently taking place as these Boomers inherit wealth from their parents. And an even “Greater Transfer”— estimated at over $30 trillion — will occur as Boomers pass on wealth to their heirs. By tax-optimizing trusts with a low-cost IOVA, advisors can control the timing of income to minimize the tax burden. This preserves more wealth for the next generation of family members — and the next generation of clients for your firm.
Driving growth in a competitive industry
With the latest innovations in technology and the adoption of technology into advisors’ practices, new products such as IOVAs are making their mark on the industry. IOVAs are growing rapidly, doubling over the past two years, with sales of nearly $5 billion as of Third Quarter 2014 compared to sales of $2.4 billion as of year-end 2012.
Another important trend is the growth of IOVAs built for RIAs and fee-based advisors. According to the latest Morningstar data, the channel to post the largest VA sales gains from Q3 2013 to Q4 2014 is independent investment firms and RIAs. Simple and transparent, with lower costs, more choice and no commissions, IOVAs are the right fit for RIAs and fee-based advisors. Most importantly, all advisors now have access to a new solution to optimize their investing strategies and manage the triple threat of low yields, rising taxes and ongoing volatility.
In his recent article, U.S. Military financial planner Mark Cussen writes, “The financial planning profession is evolving at an increasingly rapid rate, and those who fail to keep up with current trends will soon be left behind.” It’s clear that adopting technology can increase efficiencies across all aspects of an advisor’s practice.
There is no question it can enhance an advisor’s capabilities for sophisticated planning, specialized portfolio construction and advanced risk management. And ultimately, technology is vital to building an advisor’s book of business and growing their practice.
In a market where every basis point counts, competition for clients — especially the high net worth — continues to increase. Innovation in technology, and the new products it creates, can help you move forward to create more value for your current clients — and attract the next generation of new clients.
Learn more about Jefferson National here.
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